Janice Lozano
The phrase skin in the game refers to the idea that universities should be held accountable for the student loans that their students take out. This means that if a student defaults on their loan, the university would be responsible for repaying some or all of the defaulted amount. There are arguments for and against this idea. Some people argue that it would reduce the financial burden on taxpayers, who currently bear the risk of student loan defaults. Others argue that it could force struggling universities out of business and reduce access to education. Overall, the idea of skin in the game for universities is a complex issue that has been gaining traction as a possible solution to the student debt crisis.
| Characteristics | Values |
|---|---|
| Student loan debt | $1.73 trillion as of 2023 |
| Average student debt balance in 2008 | $18,200 |
| Average student debt balance in 2023 | $37,100 |
| Percentage increase in average student debt balance in 16 years | 104% |
| Percentage of federal student loan recipients who also borrow on their credit cards | 20% |
| Percentage of college students who graduate within 4 years | 41% |
| Percentage of college students who graduate from 4-year programs in 6 years | 64% |
| Percentage of graduates who are underemployed in their first job | 40% |
| Percentage of default a college can have to maintain accreditation | 40% |
| Percentage of defaulted loans colleges would have to pay back per the Reed bill | 20% |
| Percentage of defaulted loans universities would have to eat per Anand Sanwal | 80% |
| Number of federal student loan borrowers waiting for the courts to decide if their repayment plan is legal | 8 million |
| Number of federal student loan borrowers who are late on their payments | 9 million |
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What You'll Learn
Universities should be liable for defaulted loans
Universities have no incentive to change their practices under the current system. They promote loans without considering how they will be repaid, profiting from the loans while passing all the risk onto taxpayers. This is similar to the role of subprime mortgage brokers in the infamous housing finance bubble.
Making universities liable for defaulted loans would create much-needed accountability. They would have a financial incentive to ensure students understand the implications of taking out loans and can reasonably expect to repay them. Universities would also need to consider students' ability to pay, guide them towards programs with promising job prospects, and adjust their mix of programs.
Some critics argue that making universities liable for defaulted loans would be inconsistent with the egalitarian view that higher education should reduce economic and educational inequalities. They worry that this policy would force struggling universities out of business, reducing access to higher education.
However, this policy would primarily impact universities with mediocre academic reputations, few endowment resources, and a high proportion of low-income, first-generation, and minority students. Good programs that create value would remain accessible, with universities genuinely invested in student success. Furthermore, universities could be given flexibility in how they implement this policy, such as by increasing efficiency, reducing costs, or shortening the time to graduation to decrease the need for borrowing.
Overall, making universities liable for defaulted loans would help address the student debt crisis and ensure universities are held accountable for their students' success.
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Universities should guide students towards programs with the best job prospects
Universities have long been criticized for lacking "skin in the game" when it comes to student loans. This phrase refers to the idea that universities should bear some financial risk if their students struggle to repay their loans. Currently, universities promote and benefit from student loans without considering the repayment ability of their students, passing all the risk to the borrowers and taxpayers. This has contributed to the soaring student debt in the US, which stood at $1.73 trillion as of 2023.
To address this issue, there have been growing calls for universities to guide students towards programs with the best job prospects. By doing so, universities can improve their students' chances of obtaining gainful employment and successfully repaying their loans. This approach aligns with the concept of "skin in the game," as universities would have a vested interest in their students' success and would be incentivized to make decisions that benefit their students' long-term career prospects.
Universities can implement this in several ways. Firstly, they can increase their focus on career preparation and course quality, ensuring that their programs equip graduates with the skills sought by employers. Secondly, universities can adjust their program offerings based on the job market's needs, collaborating with employers to identify in-demand skills and developing programs that meet those demands.
Additionally, universities can provide comprehensive career guidance and resources to help students make informed decisions about their academic and professional paths. This includes offering realistic information about the potential earnings and job prospects associated with different programs, enabling students to make well-informed choices.
Furthermore, universities can invest in their students through income-sharing agreements. In this model, the university covers some or all of the student's tuition fees in exchange for a percentage of their post-graduate income. This approach directly aligns the university's interests with the student's success, as the university only benefits financially if the student secures a well-paying job after graduation.
By adopting these measures, universities can demonstrate their commitment to their students' long-term success and play a proactive role in improving their graduates' job prospects. This, in turn, contributes to the broader goal of reducing student loan defaults and the financial burden on borrowers and taxpayers.
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Universities should invest in their students
Universities should have some 'skin in the game' when it comes to student loans. This means they should share the financial responsibility and risk associated with student loans. If universities were liable for a portion of defaulted loans, they would have an incentive to ensure their students' success. This could take the form of a progressive penalty, where better-endowed universities absorb a larger percentage of losses associated with defaults.
Additionally, universities could invest in their students through Income Share Agreements. Purdue University, for example, invests in its students by covering some or all of the costs of attendance in exchange for a share of the student's post-graduate income. This way, the university benefits from the student's success, incentivizing them to provide quality education and career preparation.
Furthermore, federal policy could incentivize universities to keep their doors open to low-income students. For instance, the government could pay bonuses to universities for every Pell Grant student they graduate. This would help balance the risk of taking on low-income students and ensure that hardworking, disadvantaged students have access to higher education.
By investing in their students, universities would become accountable for their students' success, improving the quality of education and career prospects for graduates. This would help reduce student loan debt and ensure that higher education is a means to lessen economic and educational inequalities.
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Universities should be penalised for low graduation rates
One proposal is to make universities liable to repay a percentage of the defaulted loan, beyond a certain baseline expected default rate that arises from unanticipated adverse circumstances. This would impact schools with mediocre academic reputations, few endowment resources, and a high proportion of low-income, first-generation, and minority students. While critics argue that this may force many universities out of business, it might be beneficial for society by reducing over-investment in higher education and reallocating resources to more productive areas.
Another proposal is to create a system of increasingly harsh penalties for universities with high default rates, with the percentage of defaulted dollars owed increasing as the default rate increases. For example, universities with default rates above 30 percent would have to pay back 20 percent of defaulted dollars. This approach targets the worst actors and creates an incentive for universities to improve their programs and support their students to succeed.
Additionally, federal policy could offer bonuses to universities for graduating students who receive Pell Grants, using the proceeds from risk-sharing payments to fund these bonuses. This would help balance the risk of taking on low-income students and ensure that hardworking, disadvantaged students have access to higher education.
Universities should also be incentivised to improve their programs and support their students' success. They should care about course quality and career preparation, becoming venture investors in their students. By aligning their interests with those of their students, universities can ensure that their students graduate and find productive employment.
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Universities should be incentivised to accept low-income students
Currently, universities face little risk if their students are unsuccessful. They promote loans without considering how they will be repaid and pass all the risk onto the taxpayers. This has contributed to the rapid climb in student debt, with the average student debt balance in the US increasing by 104% from 2008 to 2023.
By having "skin in the game", universities would become more selective in their admissions and focus on improving course quality and career preparation. This would help reduce over-investment in higher education and reallocate resources to more productive areas. Additionally, it would encourage universities to invest in their students' success, acting as venture investors in their students' future success.
However, critics argue that this proposal could reduce access to education, particularly for low-income students. Universities might become even more selective, potentially locking out students who could benefit from a university education. To balance this, federal policy could provide bonuses to universities for graduating low-income students, ensuring that universities remain accessible to hardworking, disadvantaged students.
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Frequently asked questions
"Skin in the game" refers to the idea that universities should be held accountable and share the financial responsibility when their students take out loans that they later struggle to repay.
Universities often promote student loans without considering how they will be repaid, and they make money from these loans while passing all the risk to the students and taxpayers. When students default on their loans, it becomes a burden on taxpayers. Advocates for universities having skin in the game believe that universities would then have greater incentives to improve their programs and support students in graduating and finding employment.
One way is to make universities liable to repay a portion of the defaulted loans. The percentage of liability could increase with the default rate. Another suggestion is to pay universities a bonus for every low-income student they graduate.
Critics argue that this approach may reduce access to education, particularly at struggling colleges that are already in dire financial straits. It may also lead to universities becoming more selective in their admissions, potentially locking out students who could benefit from a university education.
